Franklin BSP Realty Trust May Be Close To Overvaluation

Core Thesis - Franklin BSP Realty Trust's profitability has been misrepresented by GAAP net income, with core profitability being significantly better, leading to a pessimistic market valuation that is beginning to correct itself [1][7] Profitability Analysis - Over the last five years, Franklin's GAAP net income increased from $66.91 million in 2019 to $68.96 million in the trailing twelve months (TTM), compounding at 0.5% annually, while net operating profit after tax (NOPAT) rose from $84.27 million to $94 million, compounding at 1.84% annually [2] - NOPAT margin has declined from 42.26% in 2019 to 17.11% in the TTM, indicating a decrease in profitability relative to operating revenue [2] - The company's invested capital turns improved from 0.21 in 2019 to 0.29 in the TTM, but returns on invested capital (ROIC) fell from 8.76% to 4.88% during the same period [2] Economic Value Creation - Management has generated economic earnings, but the firm experienced an economic loss of -$65.74 million from 2019 to TTM, with a loss of -$42.88 million in the TTM period alone [3][4] - Franklin's historical ROIC is close to its weighted average cost of capital (WACC), making it sensitive to declines in profitability or increases in WACC, which occurred in 2022 [4] Free Cash Flow (FCF) Generation - Free cash flow generation has been poor, improving from -$73 million in 2019 to -$3.57 million in the TTM, with a yield on FCF of -0.32% [4] Valuation Metrics - The economic book value (EBV) indicates that Franklin is undervalued, with a price-to-economic-book-value ratio of 1.16, suggesting attractiveness for potential investors [5] - If the stock price reaches $18.26, it would signal the end of the current buy opportunity, and shareholders should consider exiting their positions [5][7]